We're into the last seven days of the RRSP sales season. March 1, 2002
is the last day to make a RRSP contribution and have it deducted from
last year 's taxable income. Investors' natural tendency to
procrastinate often leads them to making rushed investment
decisions. While last week's article suggested some good Canadian
funds to consider for your RRSP, this week's focus is on some of my
favourite foreign funds.

Foreign content limits

No discussion of foreign fund picks is complete without first
summarizing the foreign content limits. Very simply, no more than 30
per cent of the book value of any RRSP, RRIF, or any variation thereof
can be held in foreign content investments. An investment's book value
(BV) is synonymous with its adjusted cost base (ACB) for tax
purposes. Hence, they're calculated in the same fashion but on an
individual account basis. Basically, BV includes not only original
purchases, but also distributions that are reinvested in additional
units of a fund. For a more detailed discussion of ACB calculations,
revisit this March 2001 article.

How much foreign content should you have? How do you exceed the limit if
needed? Check out this older article, which addresses these issues.

There are a couple of ways to implement your desired foreign content.

Going global

The simplest way to gain foreign stock exposure is to buy one fund
with the flexibility to buy any company, in any country, and in any
industry. This type of fund is a global stock fund. Here are some of
my favourites in this category.

AGF International Value, Templeton Growth, and Trimark Fund SC are three of my favourites in this category. Each of these is a good,
broad-based global fund that does not exhibit style extremes (i.e. not
strict value, not pure growth - but near the middle with a value
tilt); emphasizes larger companies; is run by a strong and deep
management team; and trades relatively infrequently. Don't buy all
three - just pick one and use it as the core of your global stock
exposure.

One other fund to consider that shares all of the above
characteristics (except that it is a strict value fund) is Mackenzie
Cundill Value C. I highlight is separately because its extreme
value style usually requires more patience than most people
have. However, investors should be handsomely rewarded over long
periods of time.

If you're more aggressive, you may prefer a global fund that has
similar characteristics, but invests in smaller companies offering
potentially better growth opportunities. In that case, Templeton
Global Smaller Companies and Saxon
World Growth may be of interest to you. There isn't much choice
for global small cap funds, but these two are quality offerings.

A more customized approach

A more customized approach to global stock exposure may appeal to some
investors. There are a few ways to do this depending on your needs,
the contents of the rest of your portfolio, and your comfort level
with risk.

If you already have lots of North American stock exposure through your
Canadian balanced and stock funds (many of which maximize foreign
content) or other industry specialty funds (which often focus on the
U.S.), you may prefer an overseas or international stock fund.

Alternately, you may feel that the U.S. stock market is so large and
liquid that simply earning what "the market" earns will be better than
most funds. In other words, you may want to invest passively in the
U.S. (via index funds) but retain the expertise of a money management
team for overseas stocks. In such a case, you might opt to buy CIBC U.S. RRSP Index, TD U.S. RSP Index, an exchange-traded fund or a regular foreign content index fund from
one of these or other firms. This type of efficient exposure to the
U.S. market would fit nicely with a fund that is mandated to invest
strictly outside of North America.

My definition of specialty funds includes everything from funds
investing in specific countries or geographic regions, to funds
emphasizing specific industries or segments. Bear in mind that these
choices are only suitable for those investors who are a bit
adventurous, even if it is only with 5% or so of the total portfolio's
value.

Good regional funds include CI Emerging Markets and Spectrum European Growth. The latter is a European stock fund providing exposure to medium sized
companies. Both of these funds are great compliments to most global
and overseas funds.

We've always been told to diversify by geography because Canada makes
up 2.5 per cent of the world's stock markets. As the global economy
has become just that - more global in nature - academic research has
noted the increasing importance of industry diversification relative
to spreading portfolios around to different countries/regions. What
has been confirmed is that diversifying by industry is now equally
important as geographic diversification.

When technology started taking off in 1998, it wasn't just in Canada
or the U.S. The industry boom grabbed other developed nations in
Europe and the Pacific Rim along for the ride. The tech bust also
dragged down stocks in the industry in all developed nations and, to a
lesser extent, in emerging markets.

The body of research, however, has concluded that emerging markets
countries are the exception to that general rule since political
issues often trump the importance of industry trends.

Does this mean you should go out and buy a bunch of industry funds?
No, because most investors couldn't handle the volatility present in
each. Rather, a more effective way is to diversify by geography,
asset class, and investment style.

Since most growth managers have a bias toward technology and health
care; and value managers have a bias toward financial services and
(for now) energy; the industry diversification will likely result
quite naturally from choosing funds with truly different management
styles.

While I have no magical answers, I hope these last two articles help
in sifting through the universe of investment options during the next
seven days.

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in
Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and
provides independent investment research to financial advisors. He can be
reached at dha@danhallett.com

Disclaimers: Consult with a
qualified investment adviser before trading. Past performance is a
poor indicator of future performance. The information on this site,
and in its related newsletters, is not intended to be, nor does it
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